Last week the Government announced a number of measures to provide financial support to businesses struggling with the impact of COVID-19, including two new Government-backed funding schemes.
In this briefing we explore which businesses are eligible for, and how to access, the financial support on offer whilst also giving our observations on the measures announced and what else businesses need to be thinking about in terms of their financings during these difficult times.
Please note: this briefing summarises the position as of this morning, Monday 23 March 2020. The Government financial support package may change and further details and guidance relating to the measures announced may be released after the date of the briefing. We will continue to provide updates as further information is released.
- Government-backed funding schemes
COVID CORPORATE FINANCING FACILITY (CCFF)
What is the CCFF?
The CCFF is a facility whereby the Bank of England will purchase commercial paper (a type of short term debt instrument) issued by eligible businesses in a minimum amount of £1 million. The scheme applies to both new issuances and sales in the secondary market, will operate for at least 12 months and is intended to relieve cashflow pressures on larger businesses making a material contribution to the UK economy. The Bank of England has stated that pricing will be comparable to that prevailing in the market prior to the COVID-19 shock.
Which businesses are eligible to apply for the CCFF?
The scheme is aimed at investment grade businesses (other than those which operate in the financial sector).
Businesses must meet the following criteria to be eligible to participate in the CCFF:
- make a material contribution to economic activity in the United Kingdom and
- have been in sound financial health prior to the COVID-19 shock
What constitutes a "material contribution to the United Kingdom economy"?
The guidance from the Bank of England states that the following will normally be regarding as meeting this requirement, businesses:
- incorporated in the United Kingdom (including those with foreign-incorporated parents) with a genuine business in the United Kingdom
- with significant employment in the United Kingdom and/or
- headquartered in the United Kingdom
They will also consider whether the business generates significant revenues, serves a large number of customers or has a number of operating sites in the United Kingdom.
What constitutes "sound financial health prior to the COVID-19 shock"?
The Bank of England states that the clearest way to demonstrate meeting this requirement is for businesses to have a minimum short-term credit rating of A-3 / P-3 / F-3 / R-3 or a long-term rating above BBB- / Baa3 / BBB- from at least one of Standard & Poor’s, Moody’s, Fitch or DBRS Morningstar as at 1 March 2020.
The Bank of England has confirmed that businesses which have been downgraded from the minimum ratings set out above since 1 March 2020 (or were at the minimum rating and on negative watch) are still eligible to apply subject to HM Treasury approval.
It is important to note that, ultimately, eligibility decisions will be made by the Bank of England's risk management staff.
The Bank of England has made it clear that the CCFF is open to first time issuers and so businesses do not have to have issued short-term debt securities in the past to participate.
Further guidance has been released for businesses who believe they are of the required rating but which do not have a formal credit rating offering another potential route to accessing the scheme other than obtaining a credit rating – click here to read this important update.
How is the CCFF accessed?
Businesses proposing to issue new debt securities to sell under the CCFF need to first contact their bank to assist in issuing the commercial paper (and discuss eligibility with the Bank of England). Not all banks issue commercial paper and a list of banks that are able to assist has been published by UK Finance. The new issuance will then need to be offered for sale directly to the Bank of England by telephone and the bank dealing with issuance will assist with this process.
CORONAVIRUS BUSINESS INTERRUPTION LOAN SCHEME (CBILS)
What is the CBILS?
Through the CBILS, the Government aims to make access to funding easier for small to medium-sized businesses which would otherwise struggle to obtain funding on normal commercial terms. It does this by providing participating lenders with a Government-backed guarantee for 80 per cent. of the amount borrowed by an eligible business thereby making the decision to lend easier for the lender. Businesses will be able to borrow up to £5 million under the CBILS and the first 12 months interest payment will be free. The CBILS will initially run for six months and supports a wide range of finance products including overdrafts, term loans, invoice finance and asset finance, with a term of up to six years.
Which businesses are eligible to apply for the CBILS?
Businesses must meet the following criteria to be eligible to participate in the CBILS:
- be based in the United Kingdom, with a turnover of no more than £45 million per annum and generate more than 50 per cent. of that turnover from trading activity and
- have a borrowing proposal which the lender considers viable in the longer term (meaning that the lender believes the provision of the finance will enable the business to trade out of any short –to-medium term difficulties) but which is unable to meet the lender's normal requirements for a commercial loan or facility.
Furthermore, whilst lenders may use the CBILS at their discretion for unsecured facilities of up to £250,000, the lender must establish that the business has a lack, or absence, of sufficient security before the scheme can be accessed for facilities over £250,000.
Businesses in the following sectors are not eligible to participate in the CBILS: banks, building societies, insurers and reinsurers (but not insurance brokers) and the public sector (including state funded primary and secondary schools, employer, professional, religious or political membership organisations or trade unions). In addition, fishery, aquaculture and agriculture businesses may not qualify for the full 12 months interest payment.
How is the CBILS accessed?
The CBILS is provided directly by lenders who are accredited partners of the British Business Bank (these range from high street lenders to challenger banks to specialist lenders and details of those participating can be found on the British Business Bank's website). It is important to note that the funding under the CBILS is at the discretion of the lender approached to provide the required financing.
Businesses should apply directly to one of those lenders for that lender to consider granting the financing sought on the lender's normal commercial terms. If the proposal cannot be met under the lender's normal terms, the lender will consider the business for funding under the CBILS. It should be noted that if the lender can offer finance on normal commercial terms without the need to make use of the scheme, they will do so.
- What else do businesses need to be thinking about?
A key consideration for businesses which already have existing financing arrangements in place is whether accessing funding under the CCFF or CBILS is permitted under those existing arrangements. As any funding sought under the schemes would be further financial indebtedness, existing financing documentation will need to be reviewed to check whether there are any restrictions on the business incurring additional debt. Businesses will also need to be looking at the impact of incurring further financial indebtedness on any existing financial covenants.
In addition to looking at whether the Government measures can offer financial support and how this sits with their existing financing arrangements, many businesses have already been looking at their existing arrangements and speaking to their lenders to work out what is/can be otherwise available to them. As mentioned in our previous briefing, thinking ahead, examining those existing arrangements and having those discussions early is crucial. For example:
- Are there any undrawn funds already available to you which can be drawn down now (such as under a revolving credit facility or an accordion facility)?
- Are any "clean-down" periods in any working capital facilities on the horizon which can be satisfied now rather than in a few weeks' time when cash may be more limited?
- Are any waivers or consents required as flagging them early will often give lenders more time to consider and respond to the request? It is important to present the case for consents and waivers with as much reasonable opinion and pragmatic information as possible.
- Is extending your existing financing arrangements an option available to you?
- Our observations on the measures
The impact of Coronavirus is already being felt by many businesses. With supply chains facing disruption and many businesses being forced to close to allow for social distancing, we are certainly in unprecedented territory (as highlighted in our previous briefing). For businesses weathering this storm, access to cash is key at present.
The Coronavirus Job Retention Scheme announced on Friday (further detailed below) was certainly a huge extension to the financial support on offer for businesses seeking to retain their workers during this period, however a key question remains as to whether the measures announced by the Government will otherwise benefit enough businesses.
Most notably, the two Government-backed funding schemes target investment grade businesses at one end of the spectrum (with the CCFF) and small-to-medium enterprises on the other (with the CBILS). In the middle of that spectrum lies the mid-market which seems to have, as yet, been overlooked in terms of access to any Government-backed funding. In the Chancellor's announcement on Friday, it was stated that further measures for larger and medium business would be announced this week. An announcement which those businesses will keenly await.
Another factor is whether businesses will be able to access the support available quickly enough. Whilst the CCFF and CBILS are open today, demand is likely to be very high and the Bank of England, together with the lenders participating in the CBILS, will no doubt be pressed to begin getting funds out as soon as possible. The British Business Bank has, for example, warned that its participating lenders will be incredibly busy, likely exacerbated with staff having to work from home.
A significant number of the other measures announced as part of the Government support package alongside the CCFF and CBILS are still in the process of being set up and therefore it is likely to be a few weeks before eligible businesses can realise the cash benefit from these measures.
These are undoubtedly extremely challenging times for businesses. The full impact of the COVID-19 shock is unlikely to be known for weeks or months. However, whether examining which Government measures businesses may be eligible for and helping them access them, or advising on existing financing arrangements or new financing arrangements, we are on hand to support our clients through these difficult times. Any business looking to access the CCFF and CBILS should look to do so as soon as possible and we look forward to guiding our clients through these new processes. Please do not hesitate to contact us if you require support.